Consumer financial fruad is a broad term for a for fraud involving investments in venture companies, public offerings for companies listed or going to be listed on stock exchanges, foreign exchange investments and other investment fraud..

We have covered other types of financial fraud such as advance fee scams, credit card fraud, and fraud involving misrepresented financial representatives, and mortgage fraud elsewhere on the Rainbow Scam Report.

Telemarketing / Boiler Room Techniques

Boiler room is a jargon term used in the financial fraud investigation area. Boiler room operators are high-pressure sales people who sit in an office making cold calls to potential investors. The investments being touted are worthless, and are often penny or microcap stocks, foreign exchange investments, risky initial public offerings or house stocks. Almost always, boiler room operators target individuals with money such as retirees, business people, or professionals.

Microcap Stocks or Penny Stocks

Microcap stocks in the U.S. refer to companies with low or "micro" capitalization's [low total value of company stock]. These companies do not have to file financial reports with the Securities and Exchange Commission. In Canada, these stocks are simply known as penny stocks, which loosely means, stocks whose stock price is less than $1.00. In Canada, penny stocks do not have to file financial statements.

Foreign Exchange Investments

Operators try to solicit money for fictitious investments in exchange instruments traded in foreign markets. Often the foreign market just happens to be going through a financial crisis, and the promoter sells the investment on the basis that it's a good buy, because the investment is undervalued, due to the financial crisis. Often the money invested doesn't even make it to the proper foreign destination.

Risky Initial Public Offerings (IPO's)

Companies that are initially becoming publicly traded companies usually do an initial public offering to raise money. Many times the boiler room operator will try to sell IPO's that are underwritten by the investment firm to whom they are working for. In these cases, the telemarketing firm either has been hired as an agent to find buyers for the initial offering, or has purchased some of the initial offering itself, and is now trying to resell it to investors at a profit.

House Stocks

House stocks are stocks that an investment firm has purchased themselves to resell at a profit. Brokers of these house stocks will try to manipulate the market by buying stock of seldom-traded companies. By doing this they artificially pump these stocks prices up higher, and then sell them to investors at a profit. The buying investors find no other buyers for their stocks. Without buyers, the stock price falls, leaving the investor with worthless stock.

Common Illegal Practices Of Boiler Room Operators

Some boiler room operators run afoul of the security laws and regulations by engaging in abusive selling practices or by not being properly registered. Some of the common problems include:

Boiler room operators making unauthorized trades in the names of investors. Once the investor discovers what the boiler room operator did, the boiler room operator advises the investor to hold onto the stock (often worthless).

Boiler room operators often do not properly register as a broker-dealer. All stockbrokers and the firms that employ them are required to register in the state or province in which they do business.

Boiler room operators have misled investors about their firm, the firm's reputation and expertise. Operators have been known to falsify records, particularly relating to unauthorized sales.

Operators at times have not disclosed to investors that the stocks were house stocks, or that their firm was underwriting the stock.

Boiler room operators not executing orders to sell a stock; often the operator doesn't want to create downward pressure on the stock price.

How To Avoid Being A Victim Of A Boiler Room Operator

Don't cave in to high-pressure tactics.

Don't make immediate investment decisions. Do some research on the potential value and risks of the investment. Make sure you understand the investment you are being offered, with its terms being clear.

Confirm that the broker [operator], and the brokerage firm are registered with the security regulators. Research the enforcement archives of the security regulatory agency to see if there have been previous enforcement orders on the broker and the firm.

Do not share personal information, particularly personal financial information, with the caller.

Know your own tolerance for risk. Many times it is just better to say no to risky companies. There are many blue-chip companies that offer growth without great risk